Barrier to Entry, New Billboard Technology to Benefit Lamar (LAMR) - Barron's

June 13, 2012 12:16 PM EDT
Lamar Advertising (Nasdaq: LAMR) is just about flat on the session Wednesday as Barron's sees big things for Lamar on rebounding ad metrics.

Though larger corporations like autos, alcohol, and cigarette slingers have swung back into highs not seen since 2008, Lamar gets 75 percent of its sales from local businesses. But mom and pop are keeping purses zipped, as the recovery has been slow around small- and medium-sized businesses.

This slow "melt up" has caused ad companies like Lamar to guide conservatively, notes Barron's. The firm issued second-quarter sales guidance of $303 million, just a touch below the $305 million expected by analysts.

Along with Clear Channel Outdoor (NYSE: CCO) and CBS Corp.'s (NYSE: CBS) CBS Outdoor, the three account for 75 percent of the roadside billboard advertising business. Lamar is the smallest of the three biggies. with just about 400,000 billboards, bus stop shelter and transit displays.

What's even better is the barrier to entry. U.S. regulation in the 1960's limited the number of billboard to be built by the side of the road.

Lamar is also making big steps into the tech era with new digital display billboards. The large displays account for 1,500 of Lamar's 150,000 billboard spots at latest count. Compared with traditional billboards, the digital displays can handle multiple advertisers and charge different rates depending on what time of day the ads are to be displayed. Which is why you might see a gas station or auto dealership advertise during rush hour, or Yum! Brands (NYSE: YUM) Taco Bell during the wee hours from 2am to 4 am.

Margins on the digital displays could be as high as 70 percent, according to Barron's data. Initial costs have dropped as well, from just over $300,000 six years ago to down around $180,000 in today's market.

One area investors might focus on is the balance sheet. Lamar's efforts to pay down debt taken on from prior acquisitions led to a first-quarter loss. This cash directive means no dividend and limited buybacks.

But, given that Lamar is a cash-flow-generating-machine, the continual debt reduction should put a smile on investors' faces. Current cash flow yield is about 10 percent, which is bounds above current 10-year Treasury rates.

Shares are going for eight times enterprise value*-to-EBITDA, which is the low-end of Lamar's historical range and less than peer Clear Channel at 8.8 times (CBS as a whole is at 7.9 times). Lamar's historical average has also been as high as 16 times EV-to-EBITDA.

So, Barron's thinks Lamar is cheap right now. Given a mid-range of 11 times expected 2012 EBITDA, that puts shares at $38, or a 43 percent premium to today's level. With those numbers, who could argue?

*EV = market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

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